The UK is facing a significant retirement challenge. A recent report from the Office of National Statistics (ONS) suggests that the number of people eligible for the State Pension will increase by over 30 per cent by 2039, to 16.5 million. Insufficient preparation will place a huge strain on public resources, and risk millions of people suffering a lifestyle decline in their retirement.
To avoid this, it’s critical that we encourage people to start saving now ready for later life. The problem is there are now a number of factors impacting the way we engage with our pensions, that mean this is easier said than done.
1. Legislative change
Changes to tax relief, the increasing real cost of pension advice and auto-enrolment have all muddied the waters around pensions. People are being given more autonomy and flexibility than ever, but many are not being equipped to make important decisions for their future.
2. Business change
The shift to auto-enrolment has triggered the demise of Occupational Pension Schemes and the rise of Contract Based DC Schemes & Master Trusts, transferring the onus for pensions planning from employer to employee. This, combined with changes in the shape of the UK workforce – with a rise in zero hour contracts and more frequent job moves – is placing pressure on employees to secure their own retirement outcomes.
3. Social change
There is no longer a job for life mentality in the UK – it’s likely that people will have six or seven employers across their working lives; by the time they reach retirement, they’ll have several pension pots to manage.
4. Technological change
Technology is driving change in the way people interact with their pension schemes. It’s facilitating flexibility and visibility, so that we’re likely to see pensions become more like bank accounts, which we can access whenever we want. Employers need to acknowledge and make the most of this.
Employers struggle to deal with these changes
Employers and employees are struggling to deal with these changes; and some more than others. While baby boomers are relatively well-prepared for retirement, Generation X have more financial pressures – sending retirement planning down their list of priorities.
For Generation Y, retirement is a difficult concept. In 40 years’ time retirement as we know it will have completely changed, meaning that this generation is almost solely focused on solving short-term financial challenges. And these are numerous. Household debt in the UK is spiralling out of control, while savings are at a record low. The result is an increase in financial stress among employees, with knock-on implications for businesses.
How can a retirement strategy help?
Employers should look beyond how they’re helping employees prepare for retirement to how they’re helping them meet day-to-day financial challenges. The priority should be placed on developing financial wellness across the workforce.
If you’re looking for where to start, segmenting your workforce is a good first step. Baby boomers, Generation Y and Generation X all have very different requirements and aspirations, and these need to be considered. Technology can play a key role here. Technology has been developed that enables employees to pick from a menu of options, from corporate ISAs to financial advice, enabling them to select the ones that best meets their needs
So what now?
Reviewing your financial strategy can be a daunting process, so it can be helpful to take a two-fold approach:
1. Tackle the short-term challenge
Consider what options you provide; how you measure success and what the alternatives are if engagement is a problem – how can this be improved?
2. Evaluate the longer-term view
Take the time to really understand your people and the risks that their poor financial health could pose to your business; will people leave or costs increase? Identifying these factors is an integral step in mitigating them.
To sum up
Fundamentally, broadening out into a financial outcome approach will benefit businesses and employees – and the sooner we’re all on board with this, the more likely that we can achieve improved financial wellness.
If you wish to understand more about this topic you may wish to watch the webinar: Is everything you know about retirement wrong? which looks at the future for UK pensions, and the impact of the market shift towards wider financial wellbeing, with practical examples of the latest innovations to ensure you stay at the forefront of your industry.